Key Points
  • With cracks forming in equity markets and economic uncertainty mounting, we believe it could remain a bumpy ride over the next few months.

  • U.S. economic data is mixed but there are signs that manufacturing weakness is bleeding into the service side of the economy; although the consumer remains a support. Pressure is building on the Fed to be more aggressive in cutting rates, but we have doubts additional cuts will be the elixir for what ails the U.S. or global economy.

  • A global manufacturing recession appears to be underway; if not yet an overall global economic recession.

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“Trying to understand is like straining through muddy water. Have the patience to wait! Be still and allow the mud to settle.”
― Lao Tzu

Cracks appearing

U.S. equity indexes have recently experienced some wild swings and an uptick in volatility—yet they have also shown some resilience, potentially misleading investors that the recent economic downturn is simply a blip. Increased trade tensions with China via another threatened tranche of tariffs (although partially delayed); Beijing’s decisions to halt agricultural purchases from the United States, let the renminbi fall relative to the dollar, and threaten additional retaliations; inverted yield curves; have all contributed to growing consternation among investors.

Volatility has increased

VIX

As yields have fallen and the inversion has deepened

LT yield curve and one month ago

Adding to the worrisome mix are apparent increasing concerns regarding the slowdown in economic growth. Should it be the case that the United States is imminently heading into a recession, it’s possible we may already be in one, given that recessions are dated near the peak in economic activity. [Read more about recession risk in Recession Watch (or Distant Early Warning).]

Lost in the day-to-day trade-related volatility are longer-term concerns. Trade is not the only culprit behind weak global growth. Protectionism has been growing as a global force—predating the start to the trade war—while significant demographic hurdles and the negative consequences of $16 trillion of negative yielding debt globally are wreaking havoc on growth. In addition, the global central bank coordination which helped bring the global financial crisis to an end has been fractured courtesy of protectionism, the trade war and political pressure on central banks. This begs the question of whether easier monetary policy is sufficient to offset the ripple effects if global growth continues to weaken and/or the trade-related hit to U.S. corporate confidence.